Guidance for Professional Advisers

The impact of the restoring of HMRC’s preferential status

by Simon Bonney

HMRC are stepping up their collection of taxes from businesses:* 

  1. The number of winding up petitions filed by HMRC against businesses reached a four year high in the period to 30 September 2019 (with 4,308 being filed).

  2. The Government is passing legislation to restore HMRC’s preferential status in insolvency scenarios so the majority of taxes (VAT, PAYE/NIC, CIS) rank ahead of floating charge secured creditors meaning that the security over assets provided to lenders will be weakened.   

With their preferential status restored, there is likely to be more appetite for HMRC to use the petition route to either recover outstanding taxes quickly or force an insolvency process so they may receive funds as a preferential creditor. (At present, in insolvency scenarios, HMRC rank as an unsecured creditor and in the majority of insolvencies, will not recover any funds at present).

Traditionally, tax funds have been an integral part of a company’s ongoing cash flow providing much needed liquidity when cash is tight.  However, in those cases where a company is unable to trade out of a precarious situation the effect will be that HMRC are likely to be more aggressive if there is a risk of HMRC arrears building.  Also secured creditors will be more aggressive as their floating charge recoveries will be reduced by HMRC’s restored preferential status. 

The draft legislation for the Finance Bill 2019/20 includes provisions allowing HMRC to make Directors and other parties personally liable (thereby “piercing the corporate veil”), if there is a risk that the company may enter insolvency (or already has entered insolvency) as long as certain conditions are met. Broadly, these provisions relate to situations where a company has entered into tax avoidance or tax evasive conduct or where there have been repeated insolvencies or non-payment of taxes (where the unpaid liability exceeds 50% of the amount owing to creditors).

Our advice

As a result of the pending restoration of HMRC’s preferential status in insolvency scenarios, your clients should be more wary of HMRC and should ensure that they are taking ongoing advice from you if cash flow problems occur to ensure they are acting in accordance with their duties.
If you have clients who may be affected by this, please get in touch with your usual Quantuma contact at the earliest opportunity.

* Following the Budget announcement on 11th, this has now been pushed back to December 2020